The Practical Guide to Financial Independence

Building wealth and being happy doing it.  Sounds like nice things to aspire to.

I found someone else that wants to help you too:  Graeme Falco.

Graeme reached out to me recently to share his new book appropriately titled Building Wealth and Being Happy: A Practical Guide to Financial Independence.Although Graeme is not a financial advisor he does seem to know a thing or two about money. He’s a chartered professional accountant.  Building Wealth and Being Happy provides an overview of financial independence, why you might want it, and the various paths you can take to get there.  Before I giveaway three (3) paperback copies of Building Wealth and Being Happy I took some time to read Graeme’s book and interview him.

Building Wealth and Being Happy

Graeme, thanks for the books!  Nice of you to follow my site as well…

Thanks for having me Mark! I’m happy to be here and have always enjoyed the enterprising and enthusiastic tone of your website. For any newcomers, let me start by defining financial independence (“FI”): it is the amount of wealth needed so you are no longer dependent on an active source of income like a job; you can rely on passive income generated by your savings. My book discusses all sorts of strategies to get to FI – stocks, bonds, gold, real estate, and what works and what doesn’t work.

Historical data tells us that a good FI goal to shoot for is a 4% safe withdrawal rate – i.e. if you have a $1,000,000 portfolio of stocks and bonds then you can live off $40,000 per year.  As you mentioned though the key is to be happy not only once you’ve reached FI, but while you’re building wealth as well. And that’s why I spend a fair bit of time diving into studies done on the relationship between money and happiness in the book.

As a reader of this site, you already know my game plan for financial independence – get out of debt while saving; investing in a low-cost but diversified way; letting time in the markets do its thing.  This sounds simple but it’s not easy – why?

It really is all about persistence.  You need time for compound growth to get to work for you – so save early and often.  It’s similar to losing weight: you can’t lose it all in one month or even three months. Meeting your goals takes dedication.  It takes doing the small, sometimes unpleasant things, repeatedly over and over until it evolves into a way of life.

One reason it’s difficult to become a regular saver and investor is that as a species we don’t do a great job of thinking about our future selves. Historically, it was advantageous for us to use up all of our scarce resources; for example, to eat all the available food as quickly as possible in case it spoils.  It shouldn’t be that way with money of course.

I think it’s important for us to separate the adrenaline filled rush of new and exciting things or situations from real happiness. Many people get stuck in a loop – the hedonic treadmill – of loving their fancy new vehicles. But in less than a year, that car becomes just “the car”, and they seek out that same warm feeling they got for another one.  The discussion on happiness studies and how to avoid getting stuck on the hedonic treadmill is covered in Chapter 1.

In Chapter 3 you tell investors to trust the stock market but be wary of financial advisors.  What are your thoughts on DIY (Do-It-Yourself) investing using indexed funds versus using the help of a fee-only advisor?  What using a robo-advisor as a hassle-way free to invest?

I’m very much a proponent of a low-fee, DIY approach.

I have nothing personal against advisors, but I do subscribe to long term market efficiency, a hypothesis developed by Professor Eugene Fama that asset prices fully reflect available information. Andrew Hallam’s dog-walking analogy describes it very well:  the owner represents a company’s true underlying value.  The dog on the leash represents that company’s stock price. Throughout the course of the walk, the dog often falls behind or runs ahead of its owner (and yes, some dogs have much longer leashes than others).  When they end their walk at home, the dog and owner are side by side. Using this analogy, in the long run, the price of a stock will always reflect what it is really worth – not the day-to-day emotions of investors.

The implication of this – it’s very difficult for advisors to beat the market.  There are some caveats and extreme situations where using an advisor may be warranted, but I don’t believe they’re the best option for most people.

Robo-advisors are interesting.  There are benefits for sure but I’m not entirely convinced.

Fee-only advisors might work for some people who get a headache just looking at their bank statements.

If you read my book, you don’t need to pay for any advisor: robo, fee-only, or otherwise.

I guess this might be a good time to ask you this:  how do you invest and why?

Low-fee, broad based index tracking ETFs (Exchange Traded Funds) of course!

I think equity and bond ETFs are a great, simple solution for the average investor. My book has both US and Canadian information, so I go into detail about how to use your RRSP and TFSA in a tax efficient manner.

Specifically in the book, check out Appendix H: Is currency risk a part of a diversified portfolio?  I make a case that because Canada’s stock market is such a small part of the world’s stock market, Canadians need to question whether their portfolio is truly diversified.

I’ve asked other contributors to this site this question – I will ask you:  should we be paying off our mortgage first OR invest while paying off the mortgage?

Great question! This is a win-win situation – there’s no wrong answer.  Paying off the mortgage provides you with a guaranteed return because you save yourself future interest costs. Of course, investing in the stock market could provide a return even greater than that.  There’s a lot more detail to cover on that question in my book, but for most people there’s probably some middle ground between the two options to be found.

Given the high costs of housing in Canada today, it might be some time before young people get to ask themselves that question. Don’t worry, Building Wealth and Being Happy goes into detail on whether you should rent or buy a place to live. For a few of the big cities in Canada right now, the answer leans heavily towards rent. But choosing a place to live isn’t strictly a financial decision.  There are emotional and lifestyle needs that fit into that answer, and Building Wealth and Being Happy discusses those as well.

Appendix B was interesting – the pitfalls of dividend investing (and you know I’m a dividend investor). What advice do you have for me and others investing this way?

I promise I don’t hate dividends! I do smile when I get that cash in my brokerage account – and that’s part of the problem. One of the reasons why I don’t prioritize dividends goes back to the efficient market hypothesis we discussed above. It’s the same reason why financial advisors aren’t able to beat the market: information about companies’ dividends and expectations for dividend growth is publicly available information and is already factored into the underlying stock price.

There are other reasons why I’m a proponent of a total return perspective, which dividends are a part of (capital growth + dividends = total return), but I won’t spoil them for you.  You’ll have to read Appendix B to find out!

Lastly Graeme, what final message do you have for readers for their FI path?

Don’t burn out!  I suggest you experiment to find the right balance between saving and spending.  Some people strive for FI as their holy grail of happiness. Upon reaching their goal these same people sometimes wake up to find out it’s just another day. Achieving FI won’t solve all of your problems. If you’re miserable now, you’ll be miserable no matter how much money you have. The good news is – you can strike a balance and you don’t have to wait to improve your life situation.

I hope readers enjoy the book and use the information to carve out their own path to FI.

FREE book and giveaway

Building wealth and being happy doing it is something we’re actively working on.  The balancing act isn’t always easy but over time we see progress – something my wife and I are proud of.  I want to thank Graeme for this interview and the books I’m ready to giveaway to a few lucky readers. I’ll draw three names at random over the next few weeks.  Enter below!

a Rafflecopter giveaway

Graeme has also, for one day only, made the e-book version of Building Wealth and Being Happy: A Practical Guide to Financial Independence FREE on Amazon on Monday, January 30thGo grab it while you can!

You can read his site here and follow him on Twitter here.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own financial advisor, I've grown our portfolio from $100,000 to well over $500,000. Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site. Delivered by Subscribe Here to My Own Advisor

44 Responses to "The Practical Guide to Financial Independence"

    1. From your Blog: “The number one thing that affects how long it takes you to get to financial independence is your savings rate.”

      That’s a factor, but not the #1 factor, rather I think it’s how much Income your savings generate over time that is the key. Save as much as you like but unless it generating a growing income over time, you won’t reach your goal as fast and as securely.

      Reply
      1. “The number one thing that affects how long it takes you to get to financial independence is your savings rate.”

        Both correct and incorrect.
        Correct if what you mean by “savings rate” is the yield you get on your savings; incorrect if what you mean by “savings rate” is how much you save. That would be your ‘saving rate’. Which is it, CPA?

        cannew: I disagree with the “Income your savings generate over time” theory, assuming you are referring to dividend income. What if all my money is tied to capital gains and not income generation/dividends? I can generate income via selling capital.

        Reply
        1. SST: “What if all my money is tied to capital gains and not income generation/dividends? I can generate income via selling capital.”

          Nothing wrong with selling capital for income, however, during 2008/2009 on would have had to sell a lot more capital. Same with the other down or no-growth periods. My income grew during 2008/2009 even though my capital (market value) dropped by almost 30%.

          Reply
        2. Thanks for the comment SST. Regarding savings rate, the graph in my blog post uses the formula: (money saved in a time period / after-tax income in that time period).

          It’s not an exact science, and many argue over whether debt repayments or other items should be included as savings or not. I’m not that interested in those arguments because the math breaks down in real life anyways. The math is based on consistent average annual returns, which obviously never happens. But it’s still a great mental exercise and really highlights how powerful saving is.

          Simple estimates are very attractive: the chart in my blog post shows you can be FI in 15 years if you save 50% of your money. Quick facts like that are good for starting discussions and introducing people to saving and investing, even if they’re just estimates.

          I highly recommend playing around with the calculator at networthify.com/calculator/earlyretirement for this kind of stuff!

          Cheers

          Reply
  1. Very good interview. I look forward to getting the book especially to see what are the pitfalls of dividend investing, because just as the author of the blog, I am very happy to follow that strategy.

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      1. SST: Checked out his site and comments on “What You Don’t Want to Hear About Dividend Stocks”, “How Much Are Those Dividends Costing You?” and “The Dividend Challenge”

        A lot of rhetoric but not much meat. Again he’s just selling etf’s.

        Reply
        1. cannew, I have to agree with you. You will find my book uses more academic arguments than those I briefly saw when I googled Meb Faber. By that I mean discussions on tax drag, practical withdrawal considerations, internal rate of return, and just generally more meat. Promise appendix B won’t let you down!

          Reply
          1. Graeme: Don’t object to your goal of helping people to achieve financial independence, as many people need to start the process or be aware that its never too late to start the process. Save, cut expenses, live within ones means and save more is how one starts. Where we differ is what and where to invest, not that the is just one route or a best route. Probably most will achieve a certain level of success if one sticks with the strategy chosen. I’ve expressed my views on this site and won’t repeat them.

  2. “Low-fee, broad based index tracking ETFs (Exchange Traded Funds) of course!”

    What else is there? Dare I comment and why pay for a book that sums it up in one sentence.
    ps: don’t sign me up for a book draw!

    Reply
  3. “…let me start by defining financial independence (“FI”): it is the amount of wealth needed so you are no longer dependent on an active source of income like a job; you can rely on passive income generated by your savings.”
    ~ The phrase and definition are mismatched. “Employment Independence” is the correct phrase for his definition. A correct definition for his “FI” phrase would be: wealth with as small a degree of dependence as possible on or to any entity which is responsible for the continuance of required future wealth. E.g. cash

    The most true and correct phrase for what most PF blogs try to ascribe to would be “Financial INTERdependence”.

    I’m sure in 2006 many a retired senior holding a portfolio chock-full of passive income trusts felt fully “financially independent”…until 2007, when they discovered they were fully financially interdependent.

    “One reason it’s difficult to become a regular saver and investor is that as a species we don’t do a great job of thinking about our future selves.” + “…trust the stock market but be wary of financial advisors…”
    ~ Bingo 2x. And things I’ll try to touch on if I ever get around to that guest blogpost.

    “I do subscribe to long term market efficiency, a hypothesis developed by Professor Eugene Fama that asset prices fully reflect available information.”
    ~ I’ll let perhaps my favourite “financially independent” finance expert rebut for me:
    I Really Want to Crush the Efficient Market Hypothesis…. ~ Cullen Roche
    “…Eugene Fama’s Efficient Market Hypothesis, a theory with faulty underlying foundations and several internal inconsistencies.”
    http://www.pragcap.com/i-really-want-to-crush-the-efficient-market-hypothesis/

    “Building wealth and being happy doing it is something we’re actively working on.”
    ~ The two are highly independent, as many studies have shown. You can be happy you are building wealth, and in which ever fashion you choose, but that’s most likely not contributing a great deal to your overall level of happiness.

    From just this review(?) I’ll give the book a 2/5 simply because it addresses the mental aspects of money. And because of this phrase: “passive income generated by your savings.”

    I’ve entered to WIN! out of curiosity. After it’s received and read, the book will be donated. Annotated, of course.

    Reply
    1. SST, great commentary. Allow me to address some of your points:

      I think my definition of financial independence is consistent with the modern literature. For example, check out the FAQ here: https://www.reddit.com/r/financialindependence/wiki/faq which states “FI is typically defined as having enough income (from investments, passive businesses, real estate, etc) to pay for your reasonable living expenses for the rest of your life. You have the freedom to do what you want with your time (within reason). Working (full or part time), hobbies which generate income, or other activities are optional at this point.”

      We’ll have to agree to disagree on the EMH. There is an abundance of actual white papers that conclude the market is at least mostly efficient in the long run. https://www0.gsb.columbia.edu/faculty/aang/papers/EMH.pdf [PDF warning]. This is the reason why mutual fund managers perform no better than a monkey throwing darts at a board – market efficiency makes speculation a matter of luck and not skill.

      Also, I’d recommend you hold off on giving a star review on this book until you read it. Not judging by the cover and all… The e-book is free on Amazon tomorrow (Jan. 30)!

      Reply
    2. I’m some distance away from “Employment Independence” but the plan is coming together…slowly…

      I think “Financial INTERdependence” also suits me just fine. That’s a good perspective.

      Yes, you owe me a blogpost.

      BTW – I really enjoyed Cullen’s article you linked to. I wonder how many devout indexers see things that way? All I ever hear about his “passive, passive, passive” and this is the only reasonable way to invest. Drives me a bit nuts actually that unless you don’t invest with only low-cost ETFs – you’re an idiot.

      Reply
  4. I’ve already read the book and thought it was quite well thought out. I read it as an ebook though, and would love to have a hardcopy so I can share it with others!

    Reply
  5. “should we be paying off our mortgage first OR invest while paying off the mortgage?”

    I’m curious to read about the detailed answer to this question in the book. Please enter me in the draw. Thanks.

    Reply
    1. fbgcai, here’s a thought experiment I like:

      If you won $500k tomorrow, would you invest (all of?) it in stocks and bonds?

      What if you won a $500k house, would you borrow against it with a mortgage to invest in stocks and bonds?

      Effectively the same question, but psychology is funny 🙂

      Cheers!

      Reply
      1. YES and YES!
        Haven’t won the lottery – but please, please give me the opportunity 🙂
        I have also invested money from my paid off house (HELOC) (so I guess its not paid off any more ?). Before it was paid off I did both paydown and invest – mind you the paydown took precedence as the mortgage was in the teens (double digits) and the guaranteed riskless ROI was VERY hard to beat.

        I was looking for the details to pass on to a millennial relative to hopefully backup up my POV to her.

        btw took you up on your generous freebie on amazon.ca – thank you very much! – look forward to reading your book

        Reply
      2. This is one thing we agree upon. And I believe it’s very much a Canadian/cultural phenomena.

        People have no problems borrowing hundreds of thousands of dollars to buy a depreciating consumer durable which, if you don’t want its market price to continually depreciate, will require perhaps just as much money allocated to maintenance. In other words, buying a house is VERY expensive.

        Yet we as a people become highly distressed if we even consider borrowing the same amount of money to buy an appreciating financial asset which requires zero dollars in maintenance and could eventually even pay for itself.

        Seems we easily fall in love with the manufactured dream and hype yet do our best to ignore factual data.

        Reply
  6. Great post. Very important to live in the present moment, instead of choosing to be happy once FI is achieved. Some of those that have already achieved FI do concede that if they had slowed down a bit and finished “the race” a little slower, that wouldn’t have been a bad thing.

    Reply
  7. Hope I win the contest, but will be reading this regardless. I just recently had an FI awakening where I realized the “compounding” effect of reducing spending. Excited to read everything and anything that helps me further down this path.

    Reply

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